Vodafone launches its own cheap phones

Aims to bolster emerging-market position, regain control of supply chain

By

AudeLagorce

LONDON (MarketWatch) -- Vodafone Group Plc on Monday unveiled its first two Vodafone-only branded ultra-low-cost mobile phones, aimed at bolstering its position in emerging markets and at offering an alternative to Nokia and Motorola's cheapest handsets.

The second-generation, or 2G, phones, called the Vodafone 125 and the Vodafone 225, are the fruit of Vodafone's recent partnership with Chinese manufacturer ZTE Corp. With a price tag of $25 to $45, depending on the model and local market conditions, the new handsets will go head to head with entry-level phones from Nokia Corp.
NOK, +0.87%
and Motorola, Inc.
MSI, -0.61%

Selling its own branded phones is part of Vodafone's strategy to strengthen its position in emerging markets such as India and Africa, from which 80% of future handset sales are expected to come. On top of its partnership with ZTE, Vodafone is working with Huawei on 3G handsets and with Sagem, the phone-manufacturing unit of France's Safran (007327), on an ultra-cheap GSM handset.

A raft of recent partnerships underscores the potential that operators such as Vodafone (VOD)
VOD, +0.68%
Telefonica
TEF, +0.23%
or Orange (013330)
FTE, -2.32%
see in the market for private-branded handsets. Mostly, they believe it offers them an opportunity to forge partnerships with local manufacturers more willing to accommodate their customization and branding needs than global vendors.

Vodafone on Monday made it clear that its foray into handsets partly stems from a desire to have more control over design and functionality than the top vendors have been willing to give it.

"The handset vendor market was turning increasingly oligopolistic in the tier 1," said Jens Schulte-Bockum, Vodafone's global director of terminals. He was referring to the top three vendors, -- Nokia, Motorola and Samsung
SSNGY, +0.00%
-- which together have nearly 70% of the market.

Neil Mawston, associate director in the global wireless practice of Strategy Analytics, said Vodafone probably thinks the time has come to get more control over the supply chain.

"They want to get a bit of power back into their own hands," he said.

Carolina Milanesi, a director in the mobile device practice of research group Gartner in London, noted that Vodafone originally said developing its own-branded phone for emerging market would allow it to reach more customers because the handset would be cheaper than anything available from Nokia or Motorola.

"But today they said $25 to $45...that's not earth shattering. At $45, you're competing with Nokia's 1100 model," she said.

Milanesi added she believes Vodafone seriously underestimates the importance of the brand to emerging-market consumers.

"Brand actually matters a great deal to these consumers. It's part of what you buy when you buy the phone. They [Vodafone] are downplaying the importance of the brand and they should pay attention to that," she said.

Other industry analysts say that while it's true that brand is crucial in some emerging markets, the ultra low-cost segment is very specific.

"What people fail to realize is that some customers in that segment may never even have heard of Nokia or Motorola," said Shailendra Pandey, an analyst in the wireless practice of ABI Research in London.

As an example of the success of operator-branded handsets can encounter in the ultra lost-cost segment, Pandey cited Reliance Communications, the largest CDMA operator in India, which has sold over one million such handsets in the week since their launch on May 2. The three new phones, called the Classic 202, 203 and 204, cost between $19 and $22.

There is a difference with Vodafone, however, in that Reliance, as India's largest company, is a "very powerful, well respected" brand in India, Pandey said.

A booming market, a distribution challenge

Getting into handsets is also an opportunity for Vodafone to develop a new source of revenue at a time when mobile sales growth is slowing in many of its home markets.

Although operator-branded phones represented only 2% of total global handset sales in 2006, Strategy Analytics predicts that ratio will rise to 8% in 2012.

The market for these phones is expected to grow 23% to $10.7 billion in 2007, according to ABI Research.

"Asia is now the most important region for demand, supply and competition in the handset industry, and Asian suppliers have significant cost advantages over suppliers from other regions," ABI Research said in a recent note.

Vodafone, which expects to sell several million of the Vodafone 125 and 225 in the first year, on Monday emphasized the importance of scale in the production of such inexpensive products.

"Volume is needed to help ZTE reach enough purchasing power with suppliers and to make the cost position sustainable," Schulte-Bockum said.

So for now Vodafone intends to develop only a few models.

"I wouldn't think of this as a huge portfolio. The virtue of scale is very important [...] It wouldn't make sense to develop a design that wouldn't sell in the millions," Schulte-Bockum added.

Mawston said that while Vodafone is clearly just testing the waters, it has little to lose.

"There's definitely an element of experimentation there. But if it flops, well, Vodafone hasn't taken a huge risk and if it goes gangbuster, there's a big opportunity there for them," he said.

As for ZTE, Mawston said they're eager to expand beyond the domestic Chinese market, where they're facing increasing pressure from Nokia and Motorola.

"They'll probably bend over backwards to make Vodafone happy," he said.

The phones launched Monday are equipped with the same Infineon Technologies
IFX, -4.44%
(623100) chipset and use the same platform as part of the effort to drive scale efficiencies. The main difference between the two is that the 225 has a color screen. They will start shipping next week to Egypt, Romania, Tanzania and South Africa and later to countries including Mozambique, Turkey, Austria and the Czech Republic.

On the topic of marketing and distribution, Vodafone said there isn't a unique recipe and that it will need to adapt to each market.

This could be well be the weakest link in the operator's strategy, Mawston said.

"Distribution in most of these markets is done through mom and pop's stores. This is where Nokia's ability remains unsurpassed. Vodafone is coming in with a reasonable product, but distribution will be a challenge," he said.

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